It was not expected to be like this. A year ago, there was rising market consensus that a bubble was brewing in bonds. As the global economy started to recover, bets from even the biggest bond investors predicted a painful bursting of this phenomenon.

Instead the bond bears have been routed. Treasury yields have tumbled to new records as stocks slumped and the rush for havens took over once more.

What was notable about yesterday’s move was its precision. This wasn’t a pell-mell rush – the falls were scaled, with the biggest drop coming for yields on the longest-dated bonds. This appeared to be a calculated “bull flattening” of the yield curve.

Bull flatteners, where longer-dated yields fall more than short-dated ones, signal a particularly bearish view on the wider economy. Short-term gloom had been building. Now the bond market is suggesting it is growing more pessimistic about the longer term.

This repricing of the outlook has taken the yield on the benchmark 10-year Treasury down a full percentage point in a month – a hefty shift from a market considered a more reliable and far-sighted indicator of economic expectations that its excitable equity counterpart.

It even means ignoring bonds’ bête noire: inflation. Data on Thursday showed a broad-based, unexpected pick-up in US price pressures last month.

At 1.8 per cent annually, this is a level that would normally prompt talk of interest rate rises.

Instead, the net result of the curve flattening appears – for now – to be a huge vote of confidence in the ability of the US Federal Reserve to control inflation while holding to its two-year promise of ultra-loose monetary policy.

In a volatile market where a month is currently a very long time, this represents a bold bet.

James Mackintosh is away

This article has been amended since original publication

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